Grappling questions (yes again)

[Lost Ohioian]

Grappling on FAQ says:

Grapple: There are some contradictions between the various rules on grappling. What is correct?
To sum up the correct rules:
1) Grappling does not deny you your Dex bonus to AC, whether you are the grappler or the target.
2) A grappled creature can still make a full attack.
3) Being pinned does not make you flat-footed, but you are denied your Dex bonus.
Update: Page 195—In Table 8–6: Armor Class Modifiers, in the entry for Grappling, delete the superscript “1” after the +0 in the Melee and Ranged columns. In the third footnote, change “flat-footed and cannot add his Dexterity bonus” to “denied its Dexterity bonus”
Update: Page 201—In the If You Are Grappled section, in the fourth sentence, change “any action that requires only one hand to perform” to “any action that doesn’t require two hands to perform.” In the fourth sentence, change “make an attack with a light or one-handed weapon” to “make an attack or full attack with a light or one-handed weapon”
Update: Page 568—In the Pinned condition, in the second sentence, change “flat-footed” to “denied its Dexterity bonus.”

Ok got it! Well actually I don't. The grappled Condition says:

Grappled: A grappled creature is restrained by a creature, trap, or effect. Grappled creatures cannot move and take a –4 penalty to Dexterity. A grappled creature takes a –2 penalty on all attack rolls and combat maneuver checks, except those made to grapple or escape a grapple. In addition, grappled creatures can take no action that requires two hands to perform. A grappled character who attempts to cast a spell or use a spell-like ability must make a concentration check (DC 10 + grappler's CMB + spell level), or lose the spell. Grappled creatures cannot make attacks of opportunity.

So break it down for me. It's changed to say Dexterity isn't affected but clearly it is under the grappled condition. I'd love an example that sets it all straight in my brain. Lets say 2 party members are attacking, oh I don't know...lets say a bugbear. Player one (ready player one, a great book FYI) starts a grapple with said bugbear and has the feats not to be AoO (improved unarmed strike and improved grapple.)
The second player makes a melee attack on the bugbear. The bugbear decides to attack with his TWF feat (If he can cause one free hand seems a bit iffy that he could he could even use that off hand for an attack. I realize he couldn't use a two-hander for sure though.)

All that said what are the pluses/minuses and adjustment to each creature in this senerio? If someone with a better grasp than I have can push this out for say the first 3 rounds of battle as an example I'd really appreciate it!

[dharkus]

it doesn't deny your whole dex to AC, just 4 of it (so -2 to AC regardless of Dex mod), denied dex to AC is a specific thing that's similar to being flat-footed and would allow you to be sneak attacked - also you can do a full attack with any amount of light weapons (most natural attacks are included here)

[Diachronos]

The bugbear is taking a -4 to its Dex if it's grappled, or denied its Dex bonus to AC entirely if it's pinned.
Both the bugbear and the grappling creature are taking a -2 on any attack/CMB rolls that aren't directly influencing the grapple (basically anything that isn't a grapple check) unless they have a feat or class feature that specifies otherwise.
The bugbear can make his full attack with two light weapons as long as he's grappled and not pinned.